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Saturday, February 27, 2016

Stock investors constantly hear the wisdom of
diversification. The concept is to simply not put all of your eggs in
one basket, which in turn helps mitigate risk, and generally leads to
better performance or return on investment.
Diversifying your hard-earned dollars does make sense, but there are
different ways of diversifying, and there are different portfolio types.
We look at the following portfolio types and suggest how to get started
building them: aggressive, defensive, income, speculative and hybrid.
It is important to understand that building a portfolio will require
research and some effort. Having said that, let's have a peek across our
five portfolios to gain a better understanding of each and get you
started.The Aggressive PortfolioAn aggressive
portfolio or basket of stocks includes those stocks with high risk/high
reward proposition. Stocks in the category typically have a high beta,
or sensitivity to the overall market. Higher beta stocks experience
larger fluctuations relative to the overall market on a consistent
basis. If your individual stock has a beta of 2.0, it will typically
move twice as much in either direction to the overall market - hence,
the high-risk, high-reward description.Most aggressive stocks (and therefore companies) are in the early
stages of growth, and have a unique value proposition. Building an
aggressive portfolio requires an investor who is willing to seek out
such companies, because most of these names, with a few exceptions, are
not going to be common household companies. Look online for companies
with earnings growth that is rapidly accelerating, and have not been
discovered by Wall Street. The most common sectors to scrutinize would
be technology, but many other firms in various sectors that are pursuing
an aggressive growth strategy can be considered. As you might have
gathered, risk management becomes very important when building and
maintaining an aggressive portfolio. Keeping losses to a minimum and
taking profit are keys to success in this type of portfolio.

The Defensive PortfolioDefensive stocks
do not usually carry a high beta, and usually are fairly isolated from
broad market movements. Cyclical stocks, on the other hand, are those
that are most sensitive to the underlying economic "business cycle." For
example, during recessionary times, companies that make the "basics"
tend to do better than those that are focused on fads or luxuries.
Despite how bad the economy is, companies that make products essential
to everyday life will survive. Think of the essentials in your everyday
life, and then find the companies that make these consumer staple products.The opportunity of buying cyclical stocks is that they offer an extra
level of protection against detrimental events. Just listen to the
business stations and you will hear portfolios managers talking about
"drugs," "defense" and "tobacco." These really are just baskets of
stocks that these managers are recommending based upon where the
business cycle is and where they think it is going. However, the
products and services of these companies are in constant demand. A defensive portfolio is prudent for most investors. A lot of these companies offer a dividend as well which helps minimize downside capital losses.

The Income Portfolio An income portfolio focuses on making money through dividends or other types of distributions to stakeholders.
These companies are somewhat like the safe defensive stocks but should
offer higher yields. An income portfolio should generate positive cash
flow. Real estate investment trusts (REITs) and master limited partnerships
(MLP) are excellent sources of income producing investments. These
companies return a great majority of their profits back to shareholders
in exchange for favorable tax status. REITs are an easy way to invest in
real estate without the hassles of owning real property. Keep in mind,
however, that these stocks are also subject to the economic climate.
REITs are groups of stocks that take a beating during an economic
downturn, as building and buying activity dries up.An income portfolio is a nice complement to most people's paycheck or
other retirement income. Investors should be on the lookout for stocks
that have fallen out of favor and have still maintained a high dividend
policy. These are the companies that can not only supplement income but
also provide capital gains. Utilities and other slow growth industries
are an ideal place to start your search.

The Speculative PortfolioA
speculative portfolio is the closest to a pure gamble. A speculative
portfolio presents more risk than any others discussed here. Finance
gurus suggest that a maximum of 10% of one's investable assets be used
to fund a speculative portfolio. Speculative "plays" could be initial public offerings
(IPOs) or stocks that are rumored to be takeover targets. Technology or
health care firms that are in the process of researching a breakthrough
product, or a junior oil company which is about to release its initial production results, would also fall into this category.Another classic speculative play is to make an investment decision
based upon a rumor that the company is subject to a takeover. One could
argue that the widespread popularity of leveraged ETFs
in today's markets represent speculation. Again, these types of
investments are alluring: picking the right one could lead to huge
profits in a short amount of time. Speculation may be the one portfolio
that, if done correctly, requires the most homework. Speculative stocks
are typically trades, and not your classic "buy and hold" investment.

The Hybrid PortfolioBuilding a hybrid type of
portfolio means venturing into other investments, such as bonds,
commodities, real estate and even art. Basically, there is a lot of
flexibility in the hybrid portfolio approach. Traditionally, this type
of portfolio would contain blue chip
stocks and some high grade government or corporate bonds. REITs and
MLPs may also be an investable theme for the balanced portfolio. A
common fixed income investment strategy approach advocates buying bonds
with various maturity dates, and is essentially a diversification
approach within the bond asset class itself. Basically, a hybrid
portfolio would include a mix of stocks and bonds in a relatively fixed
allocation proportions. This type of approach offers diversification
benefits across multiple asset classes as equities and fixed income
securities tend to have a negative correlation with one another.The Bottom LineAt the end of the day, investors
should consider all of these portfolios and decide on the right
allocation across all five. Here, we have laid the foundation by
defining five of the more common types of portfolios. Building an
investment portfolio does require more effort than a passive, index
investing approach. By going it alone, you will be required to monitor
your portfolio(s) and re-balance more frequently, thus racking up
commission fees. Too much or too little exposure to any portfolio type
introduces additional risks. Despite the extra required effort, defining
and building a portfolio will increase your investing confidence, and
give you control over your finances.

Saturday, February 13, 2016

When stock markets become volatile, investors get nervous. In many cases, this prompts them to take money out of the market and keep it in cash.
Cash can be seen, felt and spent at will, and having money on hand
makes many people feel more secure. But how safe is it really? Read on
to find out whether your money is safer in the market or under your
mattress.All Hail Cash?There
are definitely some benefits to holding cash. When the stock market is
in free fall, holding cash helps you avoid further losses. Even if the
stock market doesn't fall on a particular day, there is always the
potential that it could have fallen. This possibility is known as systematic risk,
and it can be completely avoided by holding cash. Cash is also
psychologically soothing. During troubled times, you can see and touch
cash. Unlike the rapidly dwindling balance in your portfolio, cash will still be in your pocket or in your bank account in the morning.However, while moving to cash might feel good mentally and help you
avoid short-term stock market volatility, it is unlikely to be a wise
move over the long term. A Loss Is Not a LossWhen your money is in the
stock market and the market is down, you may feel like you've lost
money, but you really haven't. At this point, it's a paper loss.
A turnaround in the market can put you right back to break even and
maybe even put a profit in your pocket. If you sell your holdings and
move to cash, you lock in your losses. They go from being paper losses
to being real losses with no hope of recovery. While paper losses don't
feel good, long-term investors accept that the stock market rises and
falls. Maintaining your positions when the market is down is the only
way that your portfolio will have a chance to benefit when the market
rebounds.Inflation Is a Cash KillerWhile having cash in your hand seems like a great way to stem your losses, cash is no defense against inflation.
You think your money is safe when it's in cash, but over time, its
value erodes. Inflation is less dramatic than a crash, but in some cases
it can be more devastating to your portfolio in the long term. Opportunity Costs Add Up.Opportunity cost
is the cost of an alternative that must be forgone in order to pursue a
certain action. Put another way, opportunity cost refers to the
benefits you could have received by taking an alternative action. In the
case of cash, taking your money out of the stock market requires that
you compare the growth of your cash portfolio, which will be negative
over the long term as inflation erodes your purchasing power, against
the potential gains in the stock market. Historically, the stock market
has been the better bet.Time Is MoneyWhen you sell your
stocks and put your money in cash, odds are that you will eventually
reinvest in the stock market. The question then becomes, "when should
you make this move?" Trying to choose the right time to get in or out of
the stock market is referred to as market timing. If you were unable to
successfully predict the market's peak and sell, it is highly unlikely that you'll be any better at predicting its bottom and buying in just before it rises.

Common Sense Is KingCommon
sense may be the best argument against moving to cash, and selling your
stocks after the market tanks means that you bought high and are selling
low. That would be the exact opposite of a good investing strategy.
While your instincts may be telling you to save what you have left, your
instincts are in direct opposition with the most basic tenet of
investing. The time to sell was back when your investments were in the
black - not when you are deep in the red.Buy and Hold on Tight.You were
happy to buy when the price was high because you expected it to go
higher. Now that it is low, you expect it to fall forever. Look at the
markets over time. They have historically gone up. Companies are in
business to make money. They have a vested interest in profitability.
Investing in equities should be a long-term endeavor, and the long term
favors those who stay invested.Serious
investors understand that the markets are no place for the faint of
heart.This is also the time to review the strength and weakness of our portfolio and make necessary reshuffling to make it ready for next up move.Don't hesitate to sell the stock of a company in loss if we could find a better opportunity in another one considering the changing business environment.